Baloise Holding AG (HBAN.SW) Earnings Call Transcript

Ladies and gentlemen, welcome to the Baloise Group Half Year Results 2021 Analyst Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Markus Holtz, Head of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Bâloise's Q&A call on our half year results 2021. On our call today, we have our CEO, Gert De Winter; our CFO, Carsten Stolz; and our CIO, Matthias Henny. So now I would like to hand over to Gert. He will give you a quick overview of our results before we open the Q&A.

Many thanks, Markus. Good morning, everybody. A warm welcome from Carsten, Matthias and my side and welcome to our half year 2021 discussion. Let me summarize our feeling as follows: We are proud and we are very satisfied with our half year results '21. proud because -- Once again, we stand by our clients when they need us most. We have helped and are helping our clients to cope with actually consequences of the extraordinary natural catastrophes that have happened in June and July. But besides being proud, we're also very satisfied because despite these exceptional circumstances, we have delivered a very strong half year result. Our bottom line exceeds CHF 300 million, which is 70% higher than half year 2020. Our growth is strong in Non-Life, over 8%, and in the capital-light, investment-type Life business over 30%. The underlying quality of our Non-Life and Life portfolio is very strong. The combined ratio in Non-Life is despite, as I said, the extreme and the extraordinary storms, [ Life ] by 92.3%, which is clearly in the bandwidth of our target, 90% to 95%. And in Life, we have achieved an EBIT of almost CHF 200 million. Our innovation strength and power remains unchanged and high. We are digitizing and digitalizing our core business stronger and faster. We have entered with FRIDAY in France. We have concluded additional partnerships in the ecosystem home and started many initiatives in the ecosystem mobility. Given our strong half year result '21, we are and I am convinced that we will reach all our strategic goals in the current strategic phase, Simply Safe: Season 1 until the end of this year. We're also very confident for the outlook of this year, and we will start Simply Safe: Season 2 as of 2022 with tailwind. Again, summarizing, proud and very satisfied. And having said that, I would like to open for the Q&A together with Carsten and Matthias, the colleagues, and Markus. Please go ahead. It's too early to promise a beer for the first question. But anyway, we're waiting for the first question.

[Operator Instructions] The first question comes from Peter Eliot from Kepler Chevreux.

The first question was on the Nat Cat that you've experienced. I mean you've guided to CHF 40 million for June and high double digit for July. So I guess over CHF 100 million in total. Could you just remind us how your reinsurance cover works for these? What your exposure is per event, reinstatement premium, maximum exposure, that would be very helpful. The second question is, if I look at your EBIT matrics on Slide 39, I guess the other result of minus CHF 38 million is a bit higher than usual. And also, if I look with the nonlife, there's an other of minus CHF 80 million, which is a bit higher than usual. Speaking to IR, it seems some of that was due to FX and maybe investment in FRIDAY. But I'm just wondering, and I apologize I've asked this question before, but are you able to give us any guidance on what you consider a sort of an underlying normal level? Or I mean, if you're in our position, how you would model those 2 numbers in particular, going forward? And then maybe finally, on costs. Could you just remind us sort of to what extent any integration costs are affecting these results, and if there's any left to come? Thank you very much.

Thank you, Peter. Let me hand over the question on reinsurance to Carsten, and I will try to pick up the other 2 questions, of course, I would say, amended by comments of Carsten and Matthias afterwards. But first, a few Carsten, on reinsurance and Cat Nat events.

Peter, thanks you for your questions. So it's right. We have CHF 40 million in H1, and we expect a high double digits on top of that for H2 as of today. So the reinsurance program or the reinsurance coverage is based on excess of loss Nat Cat coverage. It depends on the lines of business what this will imply in the end. I think we need to wait a little bit until we see the structure of the events to be able to quantify this. But as we speak, we are expecting a high double-digit number on top of the CHF 40 million that we already have accounted for in the first half. The second question was on EBIT.

Yes. So let me first handle the others or the group business, if you want, or the others. I think the large part of that number is indeed affected by FRIDAY results. That is clear. FRIDAY is still prioritizing growth over profitability. So it's still an investment. So that's the bigger part of the others in EBIT. If you look at Non-Life EBIT, a couple of things maybe. Of course, there has been the exceptional storms in June, which account for net CHF 40 million approximately, which has an impact. It's also the fact that half year 2020 has, of course, known somewhat deeper frequency in claims. So that has, I would say, normalized in the half year 2021. So that also plays a role. And what is certainly also the case is that, from a capital market side, from a financial income point of view, we have been a bit holding back on Non-Life, maybe a bit more on Life then to compensate, but that certainly also has its effect. And then the third question on costs. Belgium is still integrating, of course, Fidea and the ex Generali so the Athora business that will last until 2023. So there are indeed some integration costs still going on until 2023. There are -- we are expecting actually CHF 40 million to CHF 50 million additional benefit P&L in Belgium given the integration after 2023. In the costs, in Belgium, especially, there's also a one-off we should take into account, which was actually the activation of the acquisition costs in Fidea last year. So that's a one-off we need to account for. And of course, we have a lot of digitalization, digitization projects going on, also the IFRS 79 project, of course, which is absorbing a lot of capacity and needs investments. So that's projects are influencing certainly the cost side. Matthias, Carsten, anything to add to the questions of Peter? No? Fine. Okay?

Could That's very helpful. Could I perhaps just quickly come back on the reinsurance and the Nat Cats and just maybe to help us understand, if we get further events, how should we think about any likely exposure? Are you able to help us there on how reinsurance may or may not kick in going forward?

That's, at this stage, hypothetical. But if we get further events that qualify for reinsurance coverage, then reinsurance will take its fair share according to the contracts and the limits. But we will -- even with further events, we will stay within our 90% to 95% net combined ratio bracket. And it doesn't have an impact on the ambition going into Simply Safe: Season 2. It always depends -- Peter, it always depends on what's the nature of the event and which are the lines of business that are affected. And that's why we would need to know how this event look like. We had a fair share of events already this year. I say this with a twinkle in my eye. So we had our share and are not unhappy if we don't have further. But if we have further events, of course, then we are going to cover the clients' needs first and then talk to the reinsurers as we do now.

The next question comes from Simon Fössmeier from Vontobel.

It's Simon from Vontobel. I'll take the beer if nobody else claims it. My question is on Life insurance. The EBIT is pretty strong. And if I look at the half year results in 2019 and 2020, half year EBIT is less than half of the full year. So if I just double the CHF 195 million, you would end up being substantially above your guidance of having at least CHF 200 million. So any special effects in the first half year that influenced the EBIT in Life?

Thank you, Simon. A couple of points maybe on the Life results. The guidance we are giving is a minimum of CHF 200 million. So it's a floor. That has always been the case. Even in difficult capital markets and interest rate environments, that's -- the CHF 200 million is the guidance as a floor. That's one. Secondly, is the strategy in Life for years has been hard work. So on the active side, we're trying, of course, to optimize the yield on one side, on the passive side in Life, we have been working with capital-light new business balancing our portfolio. We have been lowering guarantees. We have, from time to time, also deliberately reserved in order to bring the guaranteed interest rate down. So it's hard work. That's one point. Of course, in the first half year of '21, what you see with the interest rates rising have allowed us not to reserve, and that's certainly an advantage. And of course, capital market conditions in the first half year have been also favorable. So that's where we see if interest rate environment and capital markets are, I would say, favorable, then we get tailwind in the Life business. And then indeed, we clearly exceed than the CHF 200 million floor guidance that we have given. Looking forward to the end of the year, it's -- as I said, it's hard work, and we continue the hard work on the active and the passive side, but it also depends, of course, on the interest rate environment and the capital markets.

The next question comes from Thomas Bateman from Berenberg.

First one on innovation investments. I know that Simply Safe: Season 2 doesn't begin until next year, but it feels like you're already investing here in 2021. So can you give us any indication of how much is invested thus far and how much you made this year? Second question is just on the loss ratio in Switzerland. I understand that it was COVID in 2020, the hailstorms in 2021. But there seems to be a slight uptick on the sort of underlying trends in Switzerland. So is there anything that's driving this? And the final question, just on the improvement in the new business margin in Life up to 47.6%. How much better can this get as the business mix improves?

Thank you, Thomas. Let me Try to start answering the question. Innovation is, of course, not new. I think since we started Simply Safe: Season 1 back in 2017. We have been focusing on innovation and not only on innovation beyond insurance, but also very importantly, innovating within our core business to make it more efficient and more easy for our partners and clients to work with us. So innovation is certainly not a new event that will start as of next year with Season 2. We have invested indeed over the last couple of years in innovation have also done so in 2021. If you take the innovation I would say, budget in the core business, so really investing in IT and so forth, we're around CHF 100 million a year, more or less, if you look going forward, we have said from the cash that we will generate, we will actually invest 10% to 30% in innovation in the core business and in initiatives beyond insurance. If you look at Switzerland and the loss ratio, I will hand over to Carsten.

Thank you, Thomas, for this question. If we look at Switzerland, the last few years, there was an alternation of years -- of normal years, but also years with -- in the first half, very benign claims environment or years with a high load of claims like, for example, last year. And bearing this in mind, the underlying book is technically very strong but there have been fluctuations especially from large claims loads and Nat Cat events over the last few years. But having said that, we don't see particular trends as we speak. And if we take the improvement question on the new business in -- new business margin in Life, obviously, it depends on the market environment and on what is the business mix that we are selling to the customers. It benefited in the first half of this year, again from products with low or no guarantees on the one hand, -- and of -- from the high pickup in investment-linked products. So it's -- it depends what the market environment does with regard to customer behavior and where we put our efforts in -- with regard to new business mix from a product perspective. But certainly, the level, nearly 50%, is very good, and it shows that the focus -- that's the hard work also on the product design side and distribution side is paying off.

And maybe 1 more element or 1 more thought on the non-life underlying in Switzerland. We have said that with a combined ratio on the group level of 92.3%, there's a 2.1% impact of the storms and the floods in June. And of course, the large majority of that part was in Switzerland. Germany has also been hit partially, but the July floodings were actually, especially Germany and Belgium. So June and half year especially Switzerland, and that's why the underlying quality of the Non-Life book in Switzerland remains exceptionally strong.

Next question comes from René Locher from Stifel.

Can you hear me?

Yes, Rene.

So again, just quickly on this follow-up on Peter's question on reinsurance. I had a look at let's put it that way, in the annual report on Page 176, there you explain your Life and Non-Life reinsurance strategies. And then it seems like the group's maximum retention for cumulative claims is CHF 20 million, and the retention for individual claims of CHF 16 million for property claims and so on and so on. So I guess what would be interesting for analysts is just to explain to us later in the year or then next year how your reinsurance cover has worked now with the June, July Nat Cats we have seen? I mean just as an idea because when I'm just looking at your strategy, it's for me hard to understand how you can end up with a high double-digit net claim? So -- and then on Germany, please. Yes, this is, Germany, I think, very interesting and you have a very strong combined ratio. So I am on Slide 37 and I see that Non-Life, I guess, these are the gross premiums. If I take 90% retention of net premiums of some CHF 466 million. And then if I calculate an underwriting margin of 7.3%, I would end up with that -- on the right thing, profit of CHF 34 million in the Non-Life. And then when I look on the -- on Slide 39, Non-Life EBIT is CHF 4.2 million. I mean, am i thinking wrong? Do I miss something here? I guess it has to do with the investments in Non-Life, IT, but perhaps you can shed a bit more light on Germany Non-Life. Then a question for Mr. Henny. I have seen you have cap increase for the Baloise's Property Fund. I guess that was at the end of July. And interestingly, I mean, real estate is still a hot topic. I was wondering how easy is it for an asset manager to find interesting real estate assets in the current market environment? Then, if I may, on Slide 21, I mean, you have touched already on the Life result. But I think this profit, my thought, is very interesting. Is there -- this high saving result is partly offset by higher policyholder participation, I guess, just as a clarification? And then just interesting in FRIDAY, I mean strategy in France. Could you just shed an little bit more light here about investments, products, what are you targeting here?

Thank you, Rene. It's very bunch of questions so [indiscernible] couple of them and then hand over to Carsten and Matthias, I'll pick Germany and FRIDAY strategy in France, if you want, and then distribute the rest of the questions among Carsten and Matthias. Germany, as you have seen over the last couple of years, we have really transformed Germany. We have -- in Life, we are clearly going for only biometric capital-light solutions. In Non-Life, we have exited the industry portfolio and focusing and growing in retail lines and SME, and that pays off because you see the combined ratio in Germany has come down and has been at a very good level and stable since a couple of years. That is one. Secondly, there is also, of course, investments going on, heavily investments in the Non-Life platform in Germany with the Guidewire platform, where we are really investing. And part of that investment is not in the combined ratio. That's about almost 1%, I would say, of combined ratio. Then there's a very technical explanation on reinsurance and shifting from 1 segment to the other, but I think that's too technical for me. So I'll leave that to Carsten afterwards. On the FRIDAY strategy in France, we have launched FRIDAY in France in -- as of 1st of July. And actually, the product we have launched there is what is called in French, multi-risk [Foreign Language]. So it's actually a combination, if you want, of household, home insurance and liability insurance, which is a mandatory insurance product in France for homeowners, but also renters. And it combines, as I said, home liability, and, to some extent, legal assistance. This product is easier than car so that's why we have chosen this strategy. It's also more profitable than car in France. So that's the reason why we have launched this multi-risk [Foreign Language] in France. And it also, as FRIDAY is a multi-country, multichannel, multiproduct strategy and has been designed as such, it allows us to prepare actually liability launch in Germany. So it's actually -- that is the reason why we have chosen this path in France. If you look at FRIDAY overall, we have been growing year-on-year with 100% since the launch in 2017, have done so also in 2020 with over 100,000 customers, and have also doubled again if you look at half year premium of FRIDAY in 2021. So overall, good on track. But questions on reinsurance, on Germany and on the real estate side, so handing over to Carsten and Matthias.